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Proactive Disclosure

Highlights

The deterioration of the economic outlook has led to a
significant reduction in projected revenues, particularly in
2009–10 and 2010–11.

The projections in this budget are based on the average of
private sector economic forecasts. However, given the degree of
uncertainty in the global economy, the Government is including
an explicit adjustment for the risks to the private sector
forecasts. This adjustment amounts to a reduction in the
budgetary balance of $0.8 billion in 2008–09, $4.5 billion in
2009–10 and 2010–11, $3 billion in 2011–12, $1.5 billion in
2012–13 and $0.8 billion in 2013–14.

After this adjustment for risk and before accounting for the
impact of the actions proposed in this budget, the Government is
projecting a small surplus in 2008–09, followed by deficits of
$15.7 billion in 2009–10, $14.3 billion in 2010–11, $8.3 billion
in 2011–12, $2.3 billion in 2012–13 and a surplus of
$5.5 billion in 2013–14.

After taking into account the cost of the measures proposed
in Budget 2009 to support the economy, the Government is
projecting deficits of $1.1 billion in 2008–09, $33.7 billion in
2009–10, $29.8 billion in 2010–11, $13.0 billion in 2011–12,
$7.3 billion in 2012–13 and a surplus of $0.7 billion in
2013–14.

The Government has designed its Economic Action Plan to
concentrate new spending in 2009–10 and 2010–11, when the
economy is expected to be weak. Starting in 2011–12, the fiscal
position of the Government is projected to improve rapidly, as
time-limited stimulus measures expire and the economy recovers.
By 2013–14, the budget is projected to be in a small surplus.

Program spending is expected to increase through 2010–11,
reflecting the impact of the measures in this budget. Over the
medium term, spending as a share of GDP is expected to return
close to its 2007–08 level. The Government remains committed to
ensuring that spending is focused and disciplined.

The debt-to-GDP ratio is expected to increase from 28.6 per
cent in 2008–09 to 32.1 per cent by 2010–11, as a result of
projected deficits. The debt-to-GDP ratio is projected to be
below its 2008–09 level by 2013–14.

The Government’s priority is to support the economy. The
Government will use budget surpluses first of all to repay the
deficits expected in the upcoming four years.

Approach to Budget Planning

The Government’s approach to budget planning is built upon the
principles of accountability, transparency and strong expenditure
management. To ensure objectivity and transparency in forecasting, the
economic forecast underlying the Government’s fiscal projections is
based on the average of the private sector economic forecasts. This
process has been followed for over a decade. This budget maintains that
approach. However, as described in Chapter 2, there is considerable
uncertainty about the future course of output, employment and commodity
prices. Given these extraordinary uncertainties, the Government has
judged it appropriate for budget planning purposes to adjust downward
the private sector forecast of nominal GDP—the broadest measure of the
tax base.

Table 4.1 shows that the private sector forecast of nominal GDP has
been adjusted down by $30 billion in each of 2009 and 2010. This is
consistent with the views of the private sector economists that the
greatest risks to the outlook are in the coming two years. With this
downward adjustment, the economic assumptions underlying the fiscal
projections are consistent with the more pessimistic private sector
economic forecasts. Starting in 2011, when risks to the economic
situation are expected to be fewer, the adjustment for risk is gradually
eliminated. By 2014, the planning assumptions are consistent with the
private sector forecast. The result is that budget revenue projections
are about $0.8 billion lower than they would be under the private sector
average in 2008–09, $4.5 billion in 2009–10 and 2010–11, $3 billion in
2011–12, $1.5 billion in 2012–13 and about $0.8 billion lower in
2013–14.

Table 4.1 Budget Planning Assumption Comparison

2008

2009

2010

2011

2012

2013

2014

(billions of dollars)

Nominal GDP level

January 2009 private
sector forecast

1,609

1,590

1,657

1,751

1,848

1,940

2,031

Budget 2009
fiscal planning

1,604

1,560

1,627

1,731

1,838

1,935

2,031

Adjustment for risk

-5

-30

-30

-20

-10

-5

2008–2009

2009–2010

2010–2011

2011–2012

2012–2013

2013–2014

Revenue effect of risk
adjustment

-0.8

-4.5

-4.5

-3.0

-1.5

-0.8

The projections presented in this budget reflect monthly financial
results through November 2008. In light of global economic uncertainty,
this budget also provides an update of the five-year fiscal projections
presented in the November 2008 Economic and Fiscal Statement.

Fiscal Planning Framework

Chart 4.1 shows the budgetary balance-to-GDP ratio since 1990-91,
after taking into account the actions outlined in Chapter 3, as well as
the impacts of recent economic developments on revenues and expenses, as
described later in this chapter.

The Government is projecting deficits of $33.7 billion in 2009–10 and
$29.8 billion in 2010–11. In order to ensure that the Government’s
fiscal position remains structurally sound, stimulus spending is
temporary—it is projected that the overwhelming majority of new spending
ends in 2011–12. As a result, it is projected that the budget balance
will improve sharply starting in 2011–12, with a return to surplus in
2013–14.

The projected deficits in 2009–10 and 2010–11 represent about 2 per
cent of GDP.

An important measure of fiscal sustainability is the debt burden as
measured by the debt-to-GDP ratio. Reductions in the debt burden in
recent years have provided Canada the flexibility to put in place
measures to support the economy that are sustainable. Under the Budget
projections, the debt-to-GDP ratio will be below its 2008–09 level by
2013–14, as shown in Chart 4.2.

Chart 4.3 shows Canada’s total government net debt-to-GDP ratio
compared to a weighted average of other G7 nations. International
comparisons rely on the standardized System of National Accounts
estimates for the total government sector (i.e. the combined national
and sub-national levels). The Organisation for Economic Co-operation and
Development (OECD) produces a complete series of estimates based on this
system. These figures facilitate international comparisons by taking
into account two important factors: differences in accounting methods
among countries which affect the comparability of data, and differences
in financial responsibilities among orders of government within
countries. Canada’s total government net debt-to-GDP ratio fell to
22.3 per cent in 2008, almost 50 percentage points below its 1995 peak,
and well below the average of other G7 countries. Adjusting OECD
projections for the announced value of stimulus plans, Canada’s total
government net debt-to-GDP ratio will remain below 30 per cent of GDP
over the next two years, while the G7 average excluding Canada is
projected to reach about 60 per cent.

The Government remains firmly committed to strong fiscal management
and to reducing the debt burden. The Government affirms that, as a first
priority, surpluses should be dedicated to repay the deficits expected
over the next four years.

Automatic Fiscal Stabilizers

The federal budget has a number of features that dampen cyclical
swings in economic activity, by automatically raising spending
and lowering tax collections when the economy slows. These are
referred to as automatic fiscal stabilizers. Through these
stabilizers, federal fiscal policy helps to dampen the economic
slowdown. The two most important automatic fiscal stabilizers
are the income tax system and the Employment Insurance system.

When the economy slows, the Government collects less
revenues, both because of the lower level of activity and
because of counter cyclical features of the tax system. In
particular, the income tax system allows taxpayers to use
certain losses to reduce taxable income in the three preceding
years. In 2008 and 2009, when more taxpayers are expected
to record losses, this is expected to result in an increased
number of taxpayers claiming refunds of taxes paid in the
previous three years. Losses that exceed the amount that an
individual taxpayer can carry back may be carried forward to
reduce the amount of income tax liabilities in future years. In
2009 and 2010, increased loss carry-backs and corporate income
tax reductions are projected to provide about $10 billion in
additional economic stimulus.

On the expense side, as the economic slowdown raises
unemployment, more people will claim Employment Insurance (EI)
benefits. This will support the economy and those most affected
by the slowdown. Furthermore, the Government has announced in
this budget that the EI premium rate will remain frozen at $1.73
per $100 of insurable earnings in 2010, when the economic
recovery is expected to remain fragile, rather than rising to
the level needed for the program to break even. Together with
the below break-even premium rate in 2009, this will provide an
additional $4.5 billion in economic stimulus in 2009 and 2010.

Strong Expenditure Management

Strategic Reviews

Underpinning the Government’s commitment to a sustainable fiscal plan
is strong expenditure management. The Expenditure Management System, the
core of which consists of ongoing strategic reviews of program spending,
supports this objective. The strategic reviews are designed to ensure
that programs are achieving their intended results, are efficiently
managed and are aligned with the priorities of Canadians. Building on
the initial year of review, which examined departmental spending of
$13.6 billion, or 15 per cent of total direct program spending, the 2008
round of reviews involved 21 departments and agencies. Ministers
examined departmental spending amounting to $25 billion, or about 27 per
cent of total direct program spending. The results of this year’s
strategic reviews are consistent with estimates conducted at the time of
the Economic and Fiscal Statement. Detailed outcomes of the 2008
strategic reviews are provided in Annex 3.

Corporate Assets

To complement the ongoing strategic reviews of departmental spending,
the Government has commenced an ongoing review of its corporate asset
holdings. Corporate assets will be assessed systematically to make sure
that the initial rationale for government ownership is still relevant,
that their activities are still effective, and that their business plans
are sustainable.

Corporate assets include enterprise Crown corporations, real property
and other holdings. Enterprise Crown corporations are not dependent on
appropriations and their principal activity and source of revenues is
the sale of goods and services, sometimes in competition with private
enterprises. The focus of the review in respect of real property will be
to identify government holdings that could be developed by the private
sector to stimulate local economic development. Other holdings include
assets where the Government competes directly with private enterprises,
earns income from a property, or performs a commercial activity.

The review of corporate assets will be led by the Minister of
Finance, with the assistance of the Parliamentary Secretary to the
Minister of Finance, in collaboration with ministers whose portfolios
have been identified for review. In its first year, the review will
focus on selected assets in the portfolios of the Minister of Finance,
the Minister of Indian and Northern Affairs, the Minister of Natural
Resources and the Minister of Transport, Infrastructure and Communities.

The reviews will include an assessment of the current relevance of
the assets to government’s core responsibilities, and of their market
value. Based on this information, reviews will assess whether value
could be created through changes to the assets’ structure and ownership,
and report on a wide set of options including the status quo, amendments
to current mandates or governance. In some cases, it may be concluded
that selling an asset to a private sector entity may generate more
economic activity and deliver greater value to taxpayers. The reviews
will seek to ensure that asset holdings are efficient, effective and
focused on priorities, and contribute to leveraging private investments
and expertise.

The Government will take a considered approach to the sale of any
asset, including taking into account the condition of markets, to ensure
that fair value can be realized by taxpayers and the transaction will
generate additional economic activity. Assets will not be sold if such
sales do not meet these tests.

Improvements to Spending Projections

In recent years, spending authorities granted to departments at the
beginning of the year have not turned out to be an accurate estimate
of departmental program requirements, resulting in departmental
appropriations being higher than needed and departments not spending the
full amounts appropriated. In 2007-08, the lapse—the amount of funding
that is appropriated by Parliament but not spent by departments—reached
its highest level in recent years at $7.6 billion, or about 9 per cent
of appropriated funds.

As described in the Economic and Fiscal Statement, steps have
been taken to better align planned and actual departmental spending so
that the spending information provided to Parliament and Canadians will
be more accurate.

Stronger Departmental Management

As indicated in the Economic and Fiscal Statement, the
Government will take a number of actions to limit discretionary spending
by departments and agencies. Specifically, departments will be asked to
freeze spending on travel, conferences and hospitality at 2008–09 levels
for the next two years. Where possible, departments will be encouraged
to explore less costly options, such as teleconferencing, and business
class travel will no longer be allowed on any flight that is less than
two hours for ministers, their staff and senior public servants.

In addition, a review of Governor in Council positions will be
conducted with the aim of reducing the number of positions. The
President of the Treasury Board was asked to lead the review and to
report back to the Prime Minister with results and recommendations.

The Government will also strengthen and improve the management of
Canada’s federal agencies, boards, commissions and Crown corporations to
achieve greater cost-effectiveness and accountability.

Structural Changes

Budget 2009 includes three structural changes, which were announced
in the November 27, 2008 Economic and Fiscal Statement:

The Government will ensure the Equalization program continues
to grow in a way that is sustainable and fair. Without action,
Equalization would have grown to $16 billion in 2009–10 and
almost $20 billion in 2010–11, which would have been
unsustainable. The Government is taking action to ensure that
the Equalization program grows in line with the economy. Other
transfers to other levels of government will also continue to
grow. Over the forecast horizon, growth in major transfers to
other levels of government is expected to average 5.2 per cent a
year.

The existing complaint-based pay equity regime is a lengthy,
costly and adversarial process that does not serve employees or
employers well. Legislation to modernize the pay equity regime
for federal public sector employees will be introduced. The new
regime reflects the Government’s commitment to pay equity. It
will ensure that the employer and bargaining agents are jointly
responsible and accountable for negotiating salaries that are
fair and equitable to all employees.

The Government will also introduce legislation to ensure the
predictability of federal public sector compensation during this
difficult economic period, by putting in place annual wage
increases for the federal public administration of 2.3 per cent
in 2007–08 and 1.5 per cent for the following three years.

Fiscal Outlook Before the Measures Proposed in Budget 2009

Table 4.2 provides a summary of the changes in the fiscal projections
since the Economic and Fiscal Statement. The budgetary balance
presented in the Statement was $0.8 billion for 2008–09, $0.1 billion
for 2009–10, $0.1 billion for 2010–11, $1.1 billion in 2011–12,
$4.2 billion in 2012–13 and $8.1 billion in 2013–14.

Table 4.2 Changes in the Status Quo Fiscal Outlook Since the November 2008 Economic and Fiscal Statement

Projection

2008–2009

2009–2010

2010–2011

2011–2012

2012–2013

2013–2014

(billions of dollars)

Economic and Fiscal Statement
Budgetary Balance

0.8

0.1

0.1

1.1

4.2

8.1

Impact of economic
changes based on
private sector average

0.2

-11.3

-9.9

-6.4

-5.0

-1.8

Budgetary balance based
on private
sector average

1.0

-11.2

-9.8

-5.3

-0.8

6.3

Adjustment for risk

-0.8

-4.5

-4.5

-3.0

-1.5

-0.8

Revised status quo
budgetary balance

0.2

-15.7

-14.3

-8.3

-2.3

5.5

Total Economic Changes
by Component

Budgetary revenues

Personal Income Tax

-0.3

-5.6

-6.4

-6.4

-3.9

-1.9

Corporate Income Tax

-2.3

-6.3

-4.2

-0.1

0.0

0.8

Goods and Services Tax

-0.5

-1.9

-1.7

-1.0

-0.6

-0.5

Other revenues

1.7

-2.9

-1.4

-0.5

0.9

2.5

Total

-1.4

-16.8

-13.8

-8.0

-3.5

0.9

Program expenses

Major transfers
to persons

0.0

-0.9

-1.0

-0.3

0.0

0.4

Major transfers to other
levels of government

0.0

-0.2

-0.2

0.0

-0.1

-0.1

Direct program expenses

-0.1

-0.3

-0.5

-0.3

-0.3

-0.4

Total

-0.1

-1.4

-1.6

-0.7

-0.3

-0.1

Public debt charges

0.9

2.4

1.0

-0.7

-2.7

-3.4

Total economic changes

-0.6

-15.8

-14.4

-9.4

-6.5

-2.6

Notes: Totals may not add due to
rounding.
A positive number implies an improvement in the budgetary
balance.
A negative number implies a deterioration in the budgetary
balance.

The underlying budgetary balance is $0.2 billion, or $0.6 billion
lower than projected at the time of the Economic and Fiscal Statement,
as lower revenues in 2008–09 are only partially offset by lower expected
public debt charges.

Consistent with sharp downward revisions to the economic outlook for
2009 and 2010, the projected underlying budgetary balance has been
revised down significantly to deficits of $15.7 billion in 2009–10,
$14.3 billion in 2010–11, $8.3 billion in 2011–12, $2.3 billion in
2012–13, and a surplus of $5.5 billion in 2013–14. Program expenses are
expected to be higher than projected in the Statement, particularly in
2009-10 and 2010-11, as major transfers to persons increase. Public debt
charges are expected to be significantly lower from 2008–09 to 2010–11,
as a result of large downward revisions to forecasted interest rates.
They are expected to rise starting in 2011–12, as a result of higher
debt levels.

The status quo forecast includes the impact of the Government’s
initiatives to support access to financing under the Extraordinary
Financing Framework, including debt charges arising from higher
government borrowing, revenues from the associated assets and estimates
of provisions for changes in the Government’s liabilities.

Budgetary revenues are lower by $1.4 billion in 2008–09,
$16.8 billion in 2009–10, $13.8 billion in 2010–11, $8.0 billion in
2011–12, and $3.5 billion in 2012–13 than at the time of the
Economic
and Fiscal Statement. With the economy recovering over the medium
term, revenues are expected to be slightly higher by 2013–14.

Personal income tax revenues are projected to be $0.3 billion
lower in 2008–09, and $5.6 billion lower in 2009–10, reflecting
weaker forecast growth in most sources of taxable income. In
addition, growth in personal income tax revenues in 2009–10
is projected to be slower than normal relative to growth in the
personal income tax base, as total personal income growth is not
expected to surpass the indexation rate of the personal income
tax system. Personal income tax revenues are projected to be
$6.4 billion lower in 2010-11 and 2011-12, $3.9 billion lower in
2012-13, and $1.9 billion lower in 2013-14, as the economy
recovers.

Corporate income tax revenues are revised down by
$2.3 billion in 2008–09, primarily reflecting an expectation
that the impact of global financial turmoil on corporate income
tax liabilities in 2008 will be greater than previously
expected. Corporate income tax revenues are revised down by
$6.3 billion in 2009–10 and $4.2 billion in 2010–11, driven
by significant downward revisions to projected net corporate
profits. The sharply lower net profits in 2009 means corporate
losses can be expected to rise significantly. This brings
greater uncertainty to the corporate income tax projections, as
the timing of the impact of weaker profits on taxes will be
determined by the level of losses and the ability of individual
taxpayers to carry losses backward or forward. The income tax
system allows corporations to smooth their income tax
liabilities over time. As such, corporations recording losses in
2009 would not only owe no taxes in respect of 2009, but could
also use the losses to request refunds of taxes paid from 2006
to 2008, with an impact on the 2009–10 fiscal year. In addition,
losses that could not be carried back could be carried forward,
thereby having a negative impact on revenues in the following
years. As these loss pools are exhausted and the economy
recovers, corporate income tax revenues are projected to be
$0.1 billion lower in 2011–12, unchanged in 2012–13, and
$0.8 billion higher in 2013–14.

GST revenues are now projected to be lower by $0.5 billion in
2008–09, $1.9 billion in 2009–10, $1.7 billion in 2010–11,
$1.0 billion in 2011–12, $0.6 billion in 2012–13 and
$0.5 billion in 2013–14, reflecting downward revisions to
projected consumer spending in 2009–10 and 2010–11.

Other revenues have been revised up since the Economic and
Fiscal Statement by $1.7 billion in 2008–09, due in part to
higher expected revenues under the Atlantic Offshore Revenue
Accounts. This revenue is transferred to Newfoundland and
Labrador and Nova Scotia. Consistent with the much weaker
economic outlook in 2009 and 2010, other revenues are revised
down by $2.9 billion in 2009–10 and $1.4 billion in 2010–11,
reflecting weaker projected revenues across most revenue
streams. As the economy recovers, and reflecting increased
returns from the Extraordinary Financing Framework, other
revenues are revised down by $0.5 billion in 2011–12, and
revised up by $0.9 billion in 2012–13, and $2.5 billion in
2013–14.

Program expenses are projected to be $0.1 billion above the level
estimated in the Economic and Fiscal Statement in 2008–09, while
increasing by $1.4 billion in 2009–10, $1.6 billion in 2010–11,
$0.7 billion in 2011–12, $0.3 billion in 2012–13 and by $0.1 billion in
2013–14.

Transfers to persons are expected to be higher by
$0.9 billion in 2009–10, $1.0 billion in 2010–11, and
$0.3 billion in 2011–12, as higher projected unemployment rates
result in higher Employment Insurance benefits. Transfers to
persons are expected to be $0.4 billion lower in 2013–14, once
the economy has recovered.

Transfers to other levels of government are slightly higher
than projected last fall.

Direct program expenses are higher by $0.3 billion in
2009–10, $0.5 billion in 2010–11 and 0.3 billion in 2011-12 and
2012-13, and $0.4 billion in 2013-14. This is partly the result
of pension expenses increasing to reflect the amortization of
2008-09 losses on market investments.

Public debt charges are projected to be lower by $0.9 billion
in 2008–09, $2.4 billion in 2009–10 and $1.0 billion in 2010–11,
due to significantly lower forecasted interest rates and, to
some extent, lower-than-expected inflation. Starting in 2011–12,
public debt charges are expected to be higher than projected at
the time of the Statement. This is partly as a result of the
increase in federal liabilities incurred to support the
Extraordinary Financing Framework, as described in Chapter 3.
While increasing public debt charges, these initiatives are also
increasing the Government’s interest revenues, which are more
than offsetting the increase in debt charges. The projections
also take into account the increase in debt associated with
other measures announced in the Budget, as well as projected
deficits.

Fiscal Cost of Measures
Proposed in Budget 2009

The measures proposed in Budget 2009 total $1.3 billion for 2008–09,
$18.0 billion for 2009–10, and $15.5 billion for 2010–11. The cost of
these measures is reflected in the projections of revenues and expenses
presented in the following pages.

Table 4.3 Fiscal Outlook

Projection

2008–2009

2009–2010

2010–2011

2011–2012

2012–2013

2013–2014

(billions of dollars)

Risk-adjusted status quo
budgetary balance

0.2

-15.7

-14.3

-8.3

-2.3

5.5

Measures proposed in the Budget

Improving Access
to Financing and
Strengthening Canada’s
Financial System

0.2

0.0

0.0

0.0

0.0

Action to Help Canadians and
Stimulate Spending

0.7

5.9

6.9

3.5

3.6

3.7

Action to Stimulate Housing
Construction

0.5

3.9

1.4

0.2

0.2

0.2

Immediate Action to Build
Infrastructure

5.7

5.1

0.1

0.1

0.1

Action to Support Businesses and
Communities

0.0

2.4

2.1

0.9

1.0

0.7

Additional tax measures
(Annex 5)

0.0

0.1

0.1

Total

1.3

18.0

15.5

4.7

5.0

4.9

Budgetary balance

-1.1

-33.7

-29.8

-13.0

-7.3

0.7

Note: Totals may not add due to
rounding.

After taking into account the cost of the measures proposed in this
budget, deficits of $1.1 billion in 2008–09, $33.7 billion in 2009–10,
$29.8 billion in 2010–11, $13.0 billion in 2011–12, and $7.3 billion in
2012–13 are projected, as well as a surplus of $0.7 billion in 2013–14.

While a short-term deterioration in budgetary balances is projected,
the Government is committed to maintain Canada’s strong structural
fiscal position, and to ensure that the budgetary balance returns to
surplus over the medium term.

Summary Statement of Transactions

Table 4.4 provides a summary of the Government’s financial position,
including the cost of measures proposed in Budget 2009.

Table 4.4 Summary Statement of Transactions

Actual

Projection

2007–2008

2008–2009

2009–2010

2010–2011

2011–2012

2012–2013

2013–2014

(billions of dollars)

Budgetary revenues

242.4

236.4

224.9

239.9

259.4

276.4

294.3

Program
expenses

199.5

206.8

229.1

236.5

235.1

244.5

254.1

Public debt
charges

33.3

30.7

29.5

33.3

37.2

39.2

39.6

Total expenses

232.8

237.4

258.6

269.7

272.3

283.7

293.7

Budgetary Balance

9.6

-1.1

-33.7

-29.8

-13.0

-7.3

0.7

Federal debt

457.6

458.7

492.4

522.2

535.2

542.4

541.8

Per cent of GDP

Budgetary
revenues

15.8

14.7

14.4

14.7

15.0

15.0

15.2

Program
expenses

13.0

12.9

14.7

14.5

13.6

13.3

13.1

Public debt charges

2.2

1.9

1.9

2.0

2.1

2.1

2.0

Total expenses

15.2

14.8

16.6

16.6

15.7

15.4

15.2

Federal debt

29.8

28.6

31.6

32.1

30.9

29.5

28.0

Note: Totals may not add due to
rounding.

Budgetary revenues are expected to decline in 2008–09 and 2009–10,
reflecting the impact of the weaker economic outlook and tax reductions.
Program expenses as a share of GDP are projected to increase to 14.7 per
cent in 2009–10, before gradually declining to 13.1 per cent in 2013–14.
This reflects the impact of weaker economic growth, as well as of the
temporary stimulus measures proposed in this budget. Public debt charges
are projected to decline somewhat as a percentage of GDP in 2008–09,
before increasing as a result of higher public debt and higher interest
rates toward the end of the projection period.

The federal debt-to-GDP ratio (accumulated deficit) stood at 29.8 per
cent in 2007–08, down significantly from its peak of 68.4 per cent in
1995–96. The debt ratio is expected to fall to 28.6 per cent in 2008–09,
before increasing to 31.6 per cent in 2009–10 and 32.1 per cent in
2010–11. The debt burden is projected to be below its 2008–09 level in
2013–14.

The Government’s Plan to Return
to Surplus

The planning approach set out in this budget
will enable the federal budget to return to a surplus position.

First, the Government will continue to carefully manage
spending. This includes the structural changes to spending
outlined earlier in this chapter—to put Equalization on a growth
path that is in line with growth in the economy and the federal
compensation regime. It also includes continuing with reviews of
departmental spending and corporate assets. As a result of these
actions, program spending in 2013–14, measured in relation to
the size of the economy, will be on par with current levels.

Second, the stimulus measures in this budget are concentrated
in the next two years, when they are needed. Consistent with the
focus on stimulus, in cases where time-limited spending does not
evolve as set out in this budget, amounts will not be rolled
forward beyond 2010–11. The Government will apply a strong "use
it or lose it" theme to the stimulus measures proposed in this
budget.

The Government will use budget surpluses first of all to
repay the deficits expected in the upcoming four years.

Outlook for Budgetary Revenues

Table 4.5 Revenue Outlook
(Including Budget 2009 measures)

Actual

Projection

2007–2008

2008–2009

2009–2010

2010–2011

2011–2012

2012–2013

2013–2014

(millions of dollars)

Tax revenues

Personal income tax

113,063

117,085

110,275

117,865

125,840

136,075

145,950

Corporate income tax

40,628

31,750

26,385

30,770

35,385

36,245

39,475

Other income tax

5,693

5,975

4,875

5,805

6,255

6,560

7,045

Total income tax

159,384

154,810

141,540

154,440

167,480

178,880

192,470

Excise taxes/duties

Goods and Service Tax

29,920

26,360

25,785

27,315

29,465

31,310

33,005

Customs import duties

3,903

4,185

4,150

4,365

4,505

4,670

4,970

Other excise taxes/duties

10,384

10,340

10,175

9,655

9,710

9,775

9,865

Total excise taxes/duties

44,207

40,880

40,115

41,340

43,680

45,755

47,835

Total tax revenues

203,591

195,690

181,650

195,780

211,160

224,635

240,305

Employment Insurance premium revenues

16,558

16,620

16,795

17,325

18,350

19,695

20,370

Other revenues

22,271

24,040

26,460

26,820

29,875

32,095

33,630

Total budgetary revenues

242,420

236,350

224,905

239,925

259,385

276,430

294,310

Per cent of GDP

Personal income tax

7.4

7.3

7.1

7.2

7.3

7.4

7.5

Corporate income tax

2.6

2.0

1.7

1.9

2.0

2.0

2.0

Goods and Services tax

1.9

1.6

1.7

1.7

1.7

1.7

1.7

Other tax revenues

1.3

1.3

1.2

1.2

1.2

1.1

1.1

Total tax revenues

13.3

12.2

11.6

12.0

12.2

12.2

12.4

Employment Insurance premium revenues

1.1

1.0

1.1

1.1

1.1

1.1

1.1

Other revenues

1.5

1.5

1.7

1.6

1.7

1.7

1.7

Total

15.8

14.7

14.4

14.7

15.0

15.0

15.2

Note: Totals may not add due to
rounding.

Personal income tax revenues—the largest component of budgetary
revenues—are projected to increase by $4.0 billion, or 3.6 per cent, to
$117.1 billion in 2008–09. Relatively slow growth in 2008-09 reflects
weak growth in taxable income, notably capital gains income and the
impact of new and previously announced tax relief measures. Personal
income tax revenue growth is further dampened in 2009–10, as total
growth in personal income is projected to be lower than the indexation
rate of the personal income tax system. Starting in 2010–11, personal
income tax revenues are projected to increase somewhat faster than
personal income, reflecting the progressive nature of the income tax
system combined with real income gains.

Corporate income tax revenues are expected to decline by 21.8 per
cent in 2008–09, and a further 16.9 per cent in 2009–10. This projected
drop in corporate tax revenues over the two years is due to increased
losses resulting from global financial turmoil, and an expected decline
of over 20 per cent in net corporate profits in 2009. It also includes
the effects of previously announced tax reductions, which came into
effect on January 1, 2008. There is, however, significant uncertainty
surrounding the magnitude of corporate losses and the timing of their
impact on corporate income tax revenues. Given that corporate income tax
revenues have been quite strong in the last three years, the projections
are based on the assumption that a high portion of losses will be
carried back, and that higher-than-normal losses recorded in 2009 and
2010 will generally have been used to reduce income tax liabilities
before the end of the projection period. Corporate income tax revenues
are projected to increase by 16.6 per cent in 2010–11 and 15.0 per cent
in 2011–12, lifted by strong growth in profits, partially offset by the
carry-forward of previous losses and ongoing tax relief. Growth is
projected to decline to 2.4 per cent in 2012–13, largely due to the
decline in the general corporate income tax rate to 15 per cent in 2012
and other tax relief measures. Growth is then projected to rise to
8.9 per cent in 2013–14, reflecting the unwinding of the impact of loss
carry-forwards.

Other income tax revenues—largely withholding taxes levied on
payments to non-residents—are expected to increase by 5.0 per cent to
$6.0 billion in 2008–09, reflecting solid growth in collections through
the first eight months of the fiscal year. Other income tax revenues are
projected to decline by 18.4 per cent in 2009–10, reflecting the
projected drop in profits together with the impact of the phase-out of
the withholding tax on non-arm’s length payments of interest to the U.S.
under the Fifth Protocol to the Canada-U.S. tax treaty, and the
elimination as of 2008 of the withholding tax on arm’s length interest
payments to all non-residents. Other income tax revenues are projected
to rise by 19.1 per cent in 2010–11 as the economy, and particularly
corporate profits, recover, and then to grow at an average rate of
6.7 per cent over the remainder of the forecast period.

GST revenues are projected to decline by 11.9 per cent in 2008–09,
largely reflecting the impact of the one-percentage-point reduction in
the GST rate to 5 per cent, effective January 1, 2008. GST revenues are
projected to decline further, by 2.2 per cent in 2009–09, consistent
with a projected decline in taxable consumption. As taxable consumption
is projected to partially recover in 2010–11, GST revenues are projected
to rise by 5.9 per cent. Growth in GST revenues is projected to average
6.5 per cent over the remainder of the projection period.

Customs import duties are projected to increase by 7.2 per cent to
$4.2 billion in 2008–09, in line with projected growth in imports.
Customs import duties are projected to decline by 0.8 per cent in
2009–10, reflecting nearly flat growth in projected imports combined
with tariff relief for machinery and equipment announced in this budget.
Growth in customs import duties is projected to recover to 5.2 per cent
in 2010–11, and to average over 4 per cent through 2013–14.

Other excise taxes and duties are projected to decline by 0.4 per
cent in 2008–09, 1.6 per cent in 2009–10 and 5.1 per cent in 2010–11,
due in part to projected declines in tobacco consumption. Other excise
taxes and duties are then projected to grow at an average rate of
0.7 per cent through 2013–14.

Employment Insurance (EI) premium revenues are expected to increase
by 0.4 per cent in 2008–09, as the projected increase in insurable
earnings is only partially offset by the decline in the premium rate
from $1.80 per $100 of insurable earnings in 2007 to $1.73, effective
January 1, 2008. EI premium revenues are projected to increase by
1.1 per cent in 2009–10 and 3.1 per cent in 2010–11, reflecting growth
in insurable earnings combined with the commitment in this Budget to
freeze the EI premium rate at $1.73 in 2010. Starting in 2011, the
premium rate is assumed to rise gradually, consistent with the principle
of breaking even over time.

Other revenues include those of consolidated Crown corporations, net
gains/losses from enterprise Crown corporations, foreign exchange
revenues, returns on investments and revenues from the sales of goods
and services. These revenues are volatile, owing partly to the impact of
exchange rate movements on the Canadian-dollar value of
foreign-denominated interest-bearing assets and to net gains/losses from
enterprise Crown corporations. Other revenues are projected to rise by
7.9 per cent in 2008–09, due in part to strong projected growth in
revenues under the Atlantic Offshore Revenue Accounts, which results in
turn from strong growth in offshore production and oil prices relative
to 2007–08. This increase is offset by a corresponding rise in projected
revenue transfers to Newfoundland and Labrador and Nova Scotia under the
Atlantic Offshore Accords, such that there is no net impact on the
budgetary balance. Other revenues are projected to rise slightly as a
share of GDP in 2009–10 and to remain stable around that level for the
remainder of the projection period. The increase as a share of GDP is
largely due to an anticipated increase in revenues derived from the
ongoing implementation of the Extraordinary Financing Framework.

Revenues as a share of GDP are projected to fall to 14.7 per cent in
2008–09. The projected decline in the revenue ratio in 2008–09 and
2009–10 reflects tax relief measures announced in this and previous
budgets, as well as a decline in taxable economic activity resulting
from the deterioration in the economic outlook. The ratio is expected to
increase to about 15.0 per cent by 2013-14, but remain below the 2007-08
level, as the economy recovers.

Outlook for Program Expenses

Table 4.6 Program Expense Outlook (Including Budget 2009 Measures)

Actual

Projection

2007–2008

2008–2009

2009–2010

2010–2011

2011–2012

2012–2013

2013–2014

(millions of dollars)

Major transfers to persons

Elderly benefits

31,955

33,350

35,160

36,595

38,420

40,525

42,630

Employment Insurance benefits1

14,298

15,585

18,920

18,960

16,740

16,785

16,945

Children’s benefits2

11,894

11,935

12,270

12,520

12,800

12,960

12,990

Total

58,147

60,870

66,350

68,075

67,960

70,270

72,565

Major transfers to other levels of
government

Federal transfers in support of
health and other social programs

31,346

33,325

35,100

36,855

38,715

40,680

42,750

Fiscal arrangements3

14,603

15,110

16,045

16,455

16,955

17,875

18,895

Alternative
payments
for standing
programs4

-2,720

-3,155

-3,080

-3,200

-3,425

-3,680

-3,940

Canada’s cities and communities

778

1,000

2,000

2,000

2,000

2,000

2,000

Other

2,145

Total

46,152

46,280

50,065

52,110

54,245

56,875

59,705

Direct program expenses

95,199

99,610

112,670

116,305

112,920

117,365

121,790

Total program expenses

199,498

206,760

229,085

236,490

235,125

244,510

254,060

Per cent of GDP

Major transfers to persons

3.8

3.8

4.3

4.2

3.9

3.8

3.7

Major transfers to other levels of
government

3.0

2.9

3.2

3.2

3.1

3.1

3.1

Direct program expenses

6.2

6.2

7.2

7.2

6.5

6.4

6.3

Total program expenses

13.0

12.9

14.7

14.5

13.6

13.3

13.1

Note: Totals may not add due to
rounding.

1 EI benefits include
regular, sickness, maternity, parental, compassionate care,
fishing and work-sharing benefits, and employment benefits and
support measures. These represent 90 per cent of total EI
program expenses. The remaining EI costs (amounting to
$1.8 billion in 2007–08) relate mainly to administration costs.

2 Consists of the Canada Tax Benefit and the Universal
Child Care Benefit.

4 Alternative payments for standing programs are a
recovery from Quebec to offset additional tax point transfers.

Table 4.6 provides an overview of the projections for program
expenses by major component, including the cost of measures proposed in
this budget. Program expenses are divided into three components: major
transfers to persons, major transfers to other levels of government and
direct program expenses.

Major transfers to persons consist of elderly, employment insurance
and children’s benefits, including the Universal Child Care Benefit.

Elderly benefits are projected to grow in line with the
elderly population and changes in consumer prices, to which
benefits are fully indexed.

Employment Insurance benefits are projected to increase by
9.0 per cent to $15.6 billion in 2008–09, reflecting higher
unemployment, as well as the growth in the maximum weekly
benefit, which is indexed to the growth in the average
industrial wage. In 2009–10, Employment Insurance benefits are
projected to increase by 21.4 per cent to $18.9 billion, and
remain at that level in 2010-11, largely due to the
two-year $2.9 billion of enhanced EI benefits and training
proposed in this budget.

Children’s benefits, including the Canada Child Tax Benefit
and the Universal Child Care Benefit, increase slightly over the
Budget forecast horizon, largely reflecting increases to the
National Child Benefit and Canada Child Tax Benefit announced in
this budget.

Major transfers to other levels of government are projected to
increase from $46.2 billion in 2007–08 to $59.7 billion in 2013–14,
averaging 5.2 per cent growth per year over the next five years. This
reflects changes outlined by the Minister of Finance at the November 3,
2008 Federal-Provincial-Territorial Finance Ministers Meeting to put
Equalization on a sustainable growth path, and ensure that it grows in
line with the economy.

Direct program expenses include operating expenses for National
Defence and other departments, transfers administered by departments for
farm income support, for natural resource royalties paid to provinces,
student financial assistance and expenses of Crown corporations. The
growth in direct program spending reflects the impact of past budget
measures, as well as initiatives announced in Budget 2009.

In 2009-10, direct program spending increases by $13.1 billion, or
13.1 per cent, reflecting initiatives under the Economic Action Plan to
support Canada’s economy and Canadians, including funding for
infrastructure and sectoral initiatives, and stimulating investment in
housing. Direct program expenses decline in 2011-12 by 2.9 per cent as
temporary measures end. Direct program expenses are expected to grow on
average by 4.1 per cent over the next five years.

Under the Economic Action Plan proposed in Budget 2009, the program
expenses-to-GDP ratio will increase temporarily.

The Government remains committed to focused and disciplined spending
and will ensure that program spending as a share of GDP comes back to
current levels in the medium term.

Financial Source/Requirement

The budgetary balance is presented on a full accrual basis of
accounting, recording government liabilities and assets when they are
incurred or acquired, regardless of when the cash is paid or received.

In contrast, the financial source/requirement measures the difference
between cash coming in to the Government and cash going out. This
measure is affected not only by the budgetary balance but also by the
Government’s non-budgetary transactions. These include changes in
federal employee pension accounts; changes in non-financial assets;
investing activities through loans, investments and advances; changes in
other financial assets and liabilities; and foreign exchange activities.

As shown in Table 4.7, significant financial requirements are
projected from 2008–09 to 2011–12, respectively of $103.7 billion in
2008–09, $101.2 billion in 2009–10, $30.7 billion in 2010–11,
$11.4 billion in 2011–12, as well as financial sources of $3.9 billion
in 2012–13 and of $47.3 billion in 2013–14. The requirements result
largely from government initiatives to support access to financing under
the Extraordinary Financing Framework (EFF). The projected budgetary
deficits also increase the financial requirements.

The large increase in market debt associated with the Insured Mortage
Purchase Program (IMPP) does not affect federal debt or the federal
government’s net debt levels as the borrowings and associated interest
costs are matched by an increase in revenue-earning assets. Other
borrowings undertaken to strengthen the financial system are also offset
by interest-earning assets.

The financial source associated with pensions and other accounts is
expected to be $3.6 billion in 2008–09. Pensions and other accounts
include the activities of the Government of Canada’s employee
superannuation plans, as well as those of federally appointed judges and
Members of Parliament. Since April 2000, the net amount of contributions
less benefit payments related to post-March 2000 service has been
invested in capital markets. Contributions and payments pertaining to
pre-April 2000 service are recorded in the pension accounts. The
Government also sponsors a variety of future benefit plans, such as
health care and dental plans and disability and other benefits for war
veterans and others.

Financial requirements for non-financial assets include the cash
outlay for the acquisition of new tangible capital assets, proceeds from
the net losses or gains of tangible capital assets, the amortization of
existing tangible assets, on the disposal of tangible capital assets,
the change in inventories, and prepaid expenses. In the calculation of
the budgetary balance, the acquisition of new capital assets is not
included; only the amortization of tangible assets is included. In the
calculation of the financial source/ requirement, this is reversed.
A net cash requirement of $1.4 billion is estimated for 2008–09.

Loans, investments and advances include the Government’s investments
in enterprise Crown corporations, such as Canada Mortgage and Housing
Corporation (CMHC), Canada Post Corporation (CPC), Export Development
Canada (EDC) and the Business Development Bank of Canada (BDC). They
also include loans, investments and advances to national and provincial
governments and international organizations, and for government
programs. The large requirements projected from 2008–09 to 2010–11 under
this category are the result of the Government’s decision to purchase
mortgages under the Insured Mortgage Purchase Program of CMHC. The
increase in loans also reflects the Government’s commitment to meet all
the borrowing needs of the CMHC, BDC and Farm Credit Canada through
direct lending in order to reduce overall borrowing costs and improve
the liquidity of the government securities market.

Risks to the Fiscal Projections

Risks associated with the fiscal projections primarily relate to
risks to the Canadian economic outlook and volatility in the
relationship between fiscal variables and the underlying economic
activity to which they relate.

Tables illustrating the sensitivity of the budget balance to a number
of economic shocks are provided later in this chapter. These tables are
generalized rules of thumb that provide a guide to the impact of changes
in economic assumptions on the fiscal projections.

Even if the economic outlook were known with certainty, there would
still be risks associated with the fiscal projections because of the
uncertainty in the translation of economic developments into spending
and tax revenues. The following are the key sources of uncertainty:

The corporate tax projections in this chapter assume a sharp
rise in corporate losses, based on the broad decline in net
corporate profits. As discussed in the box entitled Automatic
Fiscal Stabilizers, the income tax system allows corporations to
use certain losses to reduce taxable income in the three
preceding years or the 20 following years. There is, however,
considerable uncertainty as to the magnitude and timing of these
losses, and their implications for corporate income tax
revenues. The actual level of corporate losses in 2009 will
depend on how the profit decline is spread across various
industries and the profitability of those industries going into
the downturn. The degree to which these losses affect revenues
and the timing of this impact will depend on the ability of
individual taxpayers to use losses to claim refunds of taxes
paid in 2006 to 2008.

Following the sharp decline in the S&P/TSX composite index
over the latter months of 2008, capital gains income could be
weaker than projected over the forecast period. Markets
typically recover prior to an economic recovery, but
market-related income is inherently difficult to forecast.
This is all the more true in times of financial turmoil,
introducing a greater level of uncertainty to the personal and
corporate income tax revenue projections.

On the expense side, the extent to which departments and
agencies do not fully use all of the resources appropriated by
Parliament varies from year to year and can materially affect
the fiscal outcome. As announced in the Economic and Fiscal
Statement, this Government is taking actions to better align
departmental appropriations with spending requirements on an
ongoing basis. In addition, during the course of the fiscal
year, departments and agencies often incur liabilities for which
no payments are made. These liabilities are recognized
throughout the year and are updated following the close of the
fiscal year as part of the normal year-end accrual adjustments.
Changes in estimates of liabilities can be significant.

Sensitivity of the Budget Balance to Economic Shocks

Changes in economic assumptions affect the projections for revenues
and expenses. The following tables illustrate the sensitivity of the
budgetary balance to a number of economic shocks:

A decrease in nominal GDP growth resulting solely from a
one-year, 1-percentage-point decrease in the rate of GDP
inflation.

A sustained 100-basis-point increase in all interest rates.

These sensitivities are generalized rules of thumb that assume any
decrease in economic activity is proportional across income and
expenditure components. Consistent with the budget plan, EI premium
rates are assumed to be fixed during the first and second calendar
years. Equal and opposite impacts would result from an increase of equal
magnitude in real or nominal GDP growth. A corresponding 100-basis-point
decrease in all interest rates is not feasible, as several key interest
rates are currently, or projected to be, below 1 per cent.

A 1-percentage-point decrease in real GDP growth reduces the
budgetary balance by $3.1 billion in the first year and $3.3 billion in
the second year.

Tax revenues from all sources fall by a total of $2.5 billion
in the first year and $2.6 billion by the second year. Personal
income tax revenues decrease as employment and wages and
salaries fall. Corporate income tax revenues fall as output and
profits decrease. GST revenues decrease as a result of lower
consumer spending associated with the fall in employment and
personal income.

Employment Insurance (EI) premiums decrease as employment,
wages and salaries fall. Consistent with the budget plan, the EI
premium rate is kept constant in both years.

Expenses rise, mainly reflecting higher EI benefits (due to
an increase in the number of unemployed).

A 1-percentage-point decrease in nominal GDP growth resulting solely
from lower GDP inflation (assuming that the Consumer Price Index moves
in line with GDP inflation) lowers the budgetary balance by $1.3 billion
in the first year and $1.0 billion in the second year.

Lower prices result in lower nominal income and, as a result,
personal income tax, corporate income tax and GST revenues all
decrease, reflecting declines in the underlying nominal tax
bases. For the other sources of tax revenue, the negative
impacts are similar under the real and nominal GDP shocks. EI
premium revenues decrease marginally in the price shock in
response to lower earnings. However, unlike the real GDP shock,
EI benefits do not rise since unemployment is unaffected by
price changes.

Partly offsetting lower revenues are the declines in the cost
of statutory programs that are indexed to inflation, such as
elderly benefit payments and the Canada Child Tax Benefit.
Payments under these programs are smaller if inflation is lower.
Public debt charges decline in the first year due to lower costs
associated with Real Return Bonds, then rise due to the higher
stock of debt.

Table 4.10 Estimated Impact of a Sustained 100-Basis Point Increase in All Interest Rates on Federal Revenues, Expenses and Budgetary Balance

Year 1

Year 2

(billions of dollars)

Federal revenues

2.0

2.2

Federal expenses

2.6

3.7

Budgetary balance

-0.6

-1.6

An increase in interest rates decreases the budgetary balance by
$0.6 billion in the first year and $1.6 billion in the second. The
decline stems entirely from increased expenses associated with public
debt charges. The greater sensitivity to interest rates relative to
previous estimates reflects increased borrowing and returns on
investments related to the Government’s Extraordinary Financing
Framework initiatives, notably the Insured Mortgage Purchase Program.
The impact on debt charges rises through time as longer-term debt
matures and is refinanced at higher rates. Moderating the overall impact
is an increase in revenues associated with the increase in the rate of
return on the Government’s interest-bearing assets, which are recorded
as part of non-tax revenues.